ICELAND
Rank: 15 Regional Rank: 8 of 41
celand’s economy is 77.1 percent free, according to our 2007 assessment, which makes it the world’s 15th freest economy. Its overall score is 0.6 percentage point lower than last year, partially reflecting new methodological detail. Iceland is ranked 8th out of 41 countries in the European region, and its overall score is higher than the regional average.
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The economy is 77.1% free
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Iceland enjoys high levels of freedom from corruption, investment freedom, trade freedom, financial freedom, property rights, business freedom, fiscal freedom, and monetary freedom. A point of pride is that Iceland is rated as the world’s least corrupt economy. The average tariff rate is low (though non-tariff barriers such as phytosanitary and agricultural restrictions are extensive), and business regulation is efficient. Virtually all commercial operations are simple and transparent. Inflation is fairly low, and foreign investment is permitted without government approval, although capital is subject to restrictions in some areas of the economy. Iceland’s financial sector is highly modern. The judiciary, independent of politics and free of corruption, has an exemplary ability to protect property rights. Iceland is relatively weaker in terms of labor freedom, investment freedom, and especially freedom from government. Total government spending equals almost 50 percent of GDP. BACKGROUND: The Republic of Iceland is a North Atlantic island with a centuries-old democratic tradition. In per capita terms, it is one of the world’s wealthiest economies. Recent market liberalization and a considerable reduction in government ownership have strengthened entrepreneurial dynamism and increased productivity in many sectors of the economy. Iceland has never applied for EU membership, which is unpopular among the country’s citizens. Although the marine sector accounts for the majority of exports, its share of the economy has declined over the years. The service sector employs more than 60 percent of the working population. How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
60
40
Europe Average = 67.5 World Average = 60.6
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1995
2007
QUICK FACTS
Population: 0.3 million GDP (PPP): $9.7 billion 8.2% growth in 2004 3.6% 5-yr. comp. ann. growth $33,051 per capita Unemployment: 3.1% Inflation (CPI): 2.8% FDI (net inflow): –$2.3 billion Official Development Assistance: Multilateral: None Bilateral: None External Debt: $3.1 billion (2002) Exports: $4.5 billion Primarily fish, fish products, aluminum, animal products, ferrosilicon, diatomite Imports: $5.3 billion Primarily machinery and equipment, petroleum products, food, textiles
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ICELAND’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 94.1 74 82.4 50.3 82.9 60 70 90 97 69.9
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support targets and quality-dependent payments. Consequently, an additional 5 percent is deducted from Iceland’s monetary freedom score to account for these policies.
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INVESTMENT FREEDOM — 60%
Iceland generally welcomes foreign investment, although the government maintains restrictions in some key areas. Foreign ownership in the fishing industry, which constitutes a major portion of the economy, is limited to 25 percent, and individuals must live in Iceland to purchase real estate. Residents and non-residents may own foreign exchange accounts, subject to reporting requirements. There are no controls or requirements on payments or current transfers, access to foreign exchange, or repatriation of profits.
100 = most free,
= world average
BUSINESS FREEDOM — 94.1%
Starting a business takes an average of five days, compared to the world average of 48 days. The business environment has allowed entrepreneurship to flourish. Obtaining a business license is simple, and closing a business is very easy. In recent years, the government has made progress in streamlining its complex and time-consuming regulatory environment. The overall freedom to start, operate, and close a business is strongly protected by the national regulatory environment.
FINANCIAL FREEDOM — 70%
Iceland’s financial sector is modern and provides a full range of financial services. Since joining the European Economic Area, Iceland has liberalized and deregulated its financial markets, allowing Icelandic financial institutions to operate on a cross-border basis in the EEA and vice versa. The government sold its stakes in two partially state-owned banks in 2003 and no longer has a presence in the commercial banking sector. The state-owned Housing Financing Fund (HFF), which enjoys public guarantees from the government and is exempt from tax liability according to the European Banking Federation, now faces competition from Icelandic banks in residential housing mortgages. The HFF holds approximately 80 percent of the individual home loan market and about 50 percent of the individual credit loan market. There were 13 domestic insurance companies and a number of foreign insurance companies operating in June 2005. The stock market has expanded rapidly and is part of a regional integrated network of exchanges in Nordic and some Baltic countries.
TRADE FREEDOM — 74%
Iceland’s weighted average tariff rate was 3 percent in 2003. Strict phytosanitary regulations, import taxes, import bans, import and export restrictions, prohibitively high agriculture tariffs, burdensome regulations, and a government agricultural policy that includes a price equalization mechanism to support agricultural exports add to the cost of trade. Consequently, an additional 20 percent is deducted from Iceland’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 82.4%
Iceland has a moderate income tax rate and a low corporate tax rate. The top income tax rate is 23.8 percent, and the top corporate tax rate is 18 percent. Other taxes include a value-added tax (VAT) and a net wealth tax. In the most recent year, overall tax revenue as a percentage of GDP was 41.9 percent.
PROPERTY RIGHTS — 90%
Private property is well protected in Iceland. The constitution provides for an independent judiciary, and the government generally respects this provision in practice. With just a few exceptions, trials are public and conducted fairly, with no official intimidation.
FREEDOM FROM GOVERNMENT — 50.3%
Total government expenditures in Iceland, including consumption and transfer payments, are high. In the most recent year, government spending equaled 45.5 percent of GDP, and the government received 4.2 percent of its total revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 97%
Corruption is perceived as almost nonexistent. Iceland ranks first out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 69.9%
The labor market operates under relatively flexible employment regulations that could be improved to enhance employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not difficult. Regulations on increasing or contracting the number of work hours are rigid.
MONETARY FREEDOM — 82.9%
Inflation in Iceland is moderate, averaging 3.6 percent between 2003 and 2005. Relatively unstable prices explain most of the monetary freedom score. The government subsidizes agricultural production, distorting the prices of agriculture products. Milk is subject to production-linked direct payments, production quotas, and administered prices, and sheep farmers receive direct payments based on
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2007 Index of Economic Freedom